A $104.2 billion combination of the world’s two biggest brewers, Anheuser-Busch InBev NV and SABMiller PLC, would redraw the map of the global beer industry and is likely to trigger higher beer prices for consumers around the world.
It is the fourth-largest takeover in history and the largest this year, according to Dealogic.
The agreement would give AB InBev a dominant presence in nearly every major market and an estimated 28.4% market share world-wide after expected divestitures—nearly three times its closest rival, Heineken NV, according to beer industry tracker Plato Logic. The combined companies would generate $64 billion in revenue.
The deal still requires regulatory approval, and would almost certainly require the company to sell off operations in the U.S. and maybe China. But even after that, it would have a leading market share in the U.S. (46%), Mexico (57%), Africa (33%), Brazil (63%) and the rest of Latin America (62%), according to Plato Logic.
The company will have six of the top 10 brands globally, including: AB InBev’s No. 3 Bud Light, No. 4 Budweiser, No. 5 Skol, No. 8 Harbin and No. 9 Brahma; and SABMiller’s Snow, which is the world’s top-selling beer, according to market research firm Euromonitor International Ltd.
A deal for SABMiller also would add the Czech Republic’s flagship beer Pilsner Urquell and Italy’s Peroni Nastro Azzurro to AB InBev’s portfolio. Those beers could join the portfolio of three global brands—Budweiser, Corona and Stella Artois—that AB InBev is pushing into all corners of the world often for higher prices than they can command in home markets.
AB InBev has a history of using acquisitions to boost profitability by cutting costs and steering consumers toward more expensive beers. CLSA analyst Caroline Levy said AB InBev has bought regional brewers in China, eliminated the regional beers, and then guided consumers toward Budweiser, which is about three times as expensive as Chinese beers, and its own higher-priced Chinese beer, Harbin.
AB InBev’s strategy rests on “trying to move everyone up the value chain” to more expensive beers, Ms. Levy said. The effort has been so effective that more Budweiser is now consumed outside the U.S. than in the birthplace of the King of Beers.
Acquiring SABMiller solves AB InBev’s most pressing problems. After years of acquisitions, the company found itself saddled with slow-growth markets with contracting beer volumes. In the U.S. and Brazil, which account for half of AB InBev’s total sales, beer volumes fell 3.9% over the first half of the year to 80.5 million barrels from 83.7 million barrels.
Analysts don’t expect those trends to change. Beer consumption in developed markets has slowed so much that the global beer market is expected to shrink this year—by 0.1%—for the first time in 30 years, according to Plato Logic.
The bulk of global growth will come from Africa, where volumes are expected to rise by 2.6%. SABMiller, which started as South African Breweries, has a 34% market share on the continent, according to Plato Logic. The company also offers AB InBev access to fast-growing markets in Latin America like Peru and Colombia, which helped SABMiller deliver a 6% increase in beverage volume over the first half of the year.
AB InBev Chief Executive Carlos Brito said last week that Africa would be a “critical driver of future growth for the combined company.” The company sent staff to evaluate opportunities on the continent earlier this year and sees opportunity to boost beer sales as the middle class grows.
Those markets will reduce AB InBev’s dependency on the U.S., its most profitable market, to about 20% of AB InBev’s beer volume from 28%, according to Plato Logic. That would be welcome news for a company that has seen its production in the U.S. drop 11% to 95 million barrels from 107 million since it bought Anheuser-Busch in 2008, according to Beer Marketer’s Insights. The decline stems from an inability to stop a two-decade downturn in Budweiser sales and a recent falloff in sales of the nation’s most popular beer, Bud Light.
HSBC analyst Carlos Laboy said Budweiser and Bud Light “are damaged and never coming back.” By contrast, he said, “Africa and Latin America are on fire.” He added, “SAB brings them all these things.”
The pending acquisition comes with plenty of headaches. AB InBev, which has a 45% market share in the U.S., is likely to have to sell SABMiller’s stake in MillerCoors LLC, a joint venture with Molson Coors Brewing Co. which sells brands like Miller Lite and Coors Light in the U.S.
Molson Coors, which has a 42% stake in MillerCoors, stands to benefit from AB InBev’s deal for SABMiller. Following an acquisition of SABMiller, Molson Coors has a contractual right to immediately buy 8% of the MillerCoors business and a first-right of refusal for the other half and an opportunity to top another buyer. SABMiller’s stake in MillerCoors is estimated to be worth more than $10 billion.
The last time AB InBev shed a U.S. asset it wound up creating a new rival in the U.S. in Constellation Brands Inc. In 2013, it sold Constellation a Mexican brewery and U.S. rights to beer brands like Corona and Modelo Especial, so that it could close a $20.1 billion acquisition of Mexico’s Grupo Modelo.
The deal gave AB InBev a footprint in Mexico, but Constellation’s success with Corona and Modelo Especial has cut into sales of Budweiser and Bud Light.
Analysts also expect AB InBev, which has an estimated 14% market share in China, to sell SABMiller’s 49% stake in CR Snow. The joint venture with China’s government-backed partner China Resources Enterprise Ltd. has a 23% market share and produces the Snow lager.
The sale could open up an opportunity for Heineken NV, Carlsberg A/S or Kirin Holdings Ltd. to expand its business in China.
The pending deal would bring radical cultural change to SABMiller. AB InBev eliminated 1,400 jobs, or about 6% of Anheuser-Busch’s workforce, after acquiring the U.S. brewer in 2008. It also installed a Brazilian executive over the business and instituted frugal practices that favor budget hotels and zero-base budgeting, a system where expenses must be justified annually.
“As soon as the paperwork was done with [Anheuser-Busch], the offices in St. Louis were dismantled and changed,” said Maarten Albarda, who worked at AB InBev for three years before starting the marketing consultancy Flock Associates Ltd. in 2013. “The financial culture for travel and expenses was from one day to the next imposed. It goes very quickly.”
By Tripp Mickle
Source: Wall Street Journal
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